Food Prices Soar as Farmers Bail on Corn

The price of corn has already climbed 25% since January and established 13 new record highs. And food prices across the board are climbing to historic highs as a result.

But don't expect a reprieve anytime soon, as farmers across the country are seeking profit elsewhere, and government emphasis on ethanol fuel is draining current stocks, creating a supply crunch.

The price of corn has surged 35% in the past year. And Terry Franci, a senior economist for the American Farm Bureau Federation, said last week that corn prices will continue to rise. In fact, Franci thinks that after averaging between $2 and $3 a bushel for decades, prices could climb as high as $6 a bushel – a threefold increase from 2005.

And while that may be a good thing for the American farmer, it's not such a good thing for the American consumer.Story continues below…

That's because corn is an integral component in the American diet. Aside from its obvious uses as a vegetable, corn is also used to make soft drinks, bubble gum, ketchup, mayonnaise, peanut butter, bread, cereal and beer. Prices for those food items are already rising due to inflation and corn's swelling price is causing more pain at the cash register.

In fact, food prices increased nearly 5% in 2007, the biggest annual jump since 1990. In 2007, the cost of a gallon of milk increased 26%; eggs went up 40%; and a loaf of white bread went from $1.05 to $1.28 from 2006 to 2008.

Last week, the USDA put March 1 corn stocks at 6.859 billion bushels, below the average trade estimate of 7.078 billion. But despite the shortfall, the USDA also said that farmers will plant only 86 million acres of corn this year, an 8% drop from 2007.

That's because many farmers are finding bigger profits in wheat and soybeans.

After jumping on the corn bandwagon last year, Virginia farmers and others around the country realized they were not making as much money with corn as they could by planting and harvesting wheat, and directly afterward a crop of soybeans, Jonah Bowles, the risk-management coordinator for the Virginia Farm Bureau Federation, told the Richmond Times.

Soybean acreage in the U.S. is expected to jump by 17.5% to 74.8 million acres, up from 63.6 million acres in 2007.

In Iowa, farmers are expected to plant 13.2 million acres of corn this spring, down 7% (or 1 million acres) from last year. Iowa is expected to plant 9.8 million acres of soybeans, up 14.6% from 8.6 million acres planted in 2007.

In Missouri, farmers are expected to plant 3.1 million acres of corn this year, down from 3.45 million a year ago. But they will plant 5.2 million acres of soybeans, up from 4.6 million a year ago.

There are many reasons for corn's price spike. Growing populations, a weak dollar, and high energy costs are all forces at work. But only one cause for higher prices is actually furnished by the U.S. government: The production of ethanol fuel.

Ethanol Fuels Corn's Price Jump

American farmers account for about 42% of the world's corn production, and the fact that corn comes from the Midwest rather than the Mideast makes it a very popular alternative energy candidate.

So popular in fact that mandates for renewable fuels, chiefly ethanol derived from corn, have steamrolled through Washington.

The 2005 energy bill contained the first-ever requirement – known as the Renewable Fuel Standard (RFS) – that alternative fuels be mixed into the nation's gasoline supply.

The original bill required the United States to incorporate 7 billion gallons of renewable fuels into its supply by 2012. Last year, the act was amended to require fuel producers to use at least 36 billion gallons of biofuel by 2022. In order to bring about this five-fold increase, the act also increased funding for bioenergy research and technology.

As a result of legislation such as this, the number of ethanol plants in the United States has increased 134, up from 50 in 1999, according to the Renewable Fuels Association. Ethanol is expected to soon absorb 30% of the nation's domestic corn production.

While the mandate was intended to decrease our nation's dependency on foreign sources and protect the environment, the ethanol movement has had some negative consequences.

A recent study from Purdue University puts the added food cost from the renewable mandate at $15 billion in 2007 – about $130 per household. And that was from ethanol usage at a fraction of what will be required in the years ahead.

Higher prices also affect meat producers and dairy farmers who rely heavily on corn to feed livestock. Pilgrim's Pride Corp. (PPC), the nation's largest chicken producer, announced in March that it was closing a North Carolina chicken processing plant, and six of 13 U.S. distribution centers, due to the jump in feed costs.

The American Meat Institute (AMI) has joined dairy, egg and turkey lobbyists to fight any increase in ethanol mandates that could divert yet more feed into fuel refineries. In fact, AMI spokeswoman Janet Riley said the group is "absolutely" opposed to more ethanol mandates and will continue to lobby against them.

Regardless of the stands being taken against ethanol, the alternative fuel still carries heavy support in Washington where gaining independence from foreign oil and supporting of the American agricultural industry are big talking points.

Morgan Stanley (MS), the second-biggest U.S. securities firm, has already raised its price forecasts for corn and soybeans by 20% on higher demand for food and ethanol.

"Aggressive and politically driven fuel-ethanol targets, and the need to increase acreage outside the U.S. to satisfy growing developing-world demand, will likely lend continued long-term support" to agricultural prices, said Morgan Stanley research analyst Hussein Allidina.

On average, food prices increase about 2.5% each year. This year, according to federal data, the overall cost of food is predicted to jump 3% to 4%. But as long as prices for soybeans, wheat and especially corn continue to rise, steeper increases will likely follow.

"There's a way out of this with fewer acres, and that's just have a bumper crop," Ed Usset, a grain marketing specialist at the University of Minnesota told the Star Tibune. "That's a hell of a thing to just bet on."

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